Revolve Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 15 speakers on the call.

Operator

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's 2nd Quarter 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. At this time, I'd like to turn the conference over to Eric Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Speaker 1

Good afternoon, everyone, and thanks for joining us to discuss Revolve's 2nd quarter 2024 results. Before we begin, I'd like to mention that we have posted a presentation containing Q2 financial highlights to our Investor Relations website located revolve.com. I would also like to remind you that this conference call will include forward looking statements, including statements related to our future growth, our inventory balance, our key priorities and operating initiatives, industry trends, our marketing events and impact, our partnerships and strategic acquisitions, our physical retail stores and our outlook for net sales, gross margin, operating expenses and effective tax rate. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including without limitation our annual report on Form 10 ks for the year ended December 31, 2023 and our subsequent quarterly reports on Form 10 Q, all of which can be found on our website at investors. Revolve.com.

Speaker 1

We undertake no obligation to revise or update any forward looking statements or information except as required by law. During our call today, we will also reference certain non GAAP financial information, including adjusted EBITDA and free cash flow. We use non GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP and our non GAAP measures may be different from non GAAP measures used by other companies. Reconciliations of non GAAP measures to the most directly comparable GAAP measures as well as the definitions of each measure, their limitations and a rationale for using them can be found in this afternoon's press release and in our SEC filings.

Speaker 1

Joining me on the call today are our Co Founders and Co CEOs, Mike Karanikolas and Michael Mente as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike.

Speaker 2

Hello, everyone, and thanks for joining us today. We delivered a strong second quarter, highlighted by a return to top line growth, net income more than doubling year over year and nearly 3 50 basis point increase in our adjusted EBITDA margin year over year. Contributing to the significant growth in profitability was meaningfully better than expected marketing efficiency as well as increased logistics efficiencies that also outperformed our guidance, helped by improving trends in our return rate as many of our return rate initiatives began to take hold late in the second quarter. Most importantly, we achieved these strong results while continuing to invest in initiatives to drive profitable growth and market share gains over the long term. With that introduction, let me step back and provide a brief recap of the Q2.

Speaker 2

Net sales were $282,000,000 an increase of 3% year over year that was driven by improved year over year trends in both segments relative to our comparisons in the Q1 of 2024. Net sales in the Revolve segment increased 4% year over year, our best performance in 6 quarters. This was partially offset by a 4% decline in Forward segment net sales, an improvement of 10 points from Forward's year over year comparison in the Q1 of 2024. While we continue to see headwinds in a dynamic luxury environment where Forward competes as one of the financially strongest operators of a multi brand luxury share. Along these lines, Michael will talk about our acquisition of a majority interest in the revered luxury brand and longtime brand partner of Forward, Alexandre Flottier.

Speaker 2

Net income for the Q2 was $15,000,000 or $0.21 per diluted share, an increase of 111% year over year. Adjusted EBITDA was $20,000,000 an increase of 97% year over year driven by a nearly 3 50 basis point expansion of our adjusted EBITDA margin. Beyond the numbers, I'm excited by our team's execution that has led to continued great progress on the strategic priorities we have outlined on prior calls. I will discuss some of the key highlights since our update last quarter. First, I'm pleased to report that we delivered even greater efficiencies in our logistics costs year over year than last quarter, contributing to our exceptional growth and profitability in the Q2.

Speaker 2

Expressed as a percentage of net sales, selling and distribution expense decreased approximately 70 basis points year over year and fulfillment expense decreased 15 basis points year over year. It was our 1st year over year decrease in fulfillment costs as a percentage of net sales in 2.5 years. I would like to acknowledge great execution by our operations team for driving these efficiencies in the U. S. And international markets.

Speaker 2

Shifting to the outlook for driving future efficiency gains, I'm thrilled to report that we are beginning to see early tangible benefits from the initiatives outlined on recent calls designed to reduce our return rates. As a proof point, our return rate declined year over year in the Q2, representing the 1st year over year decline for any quarter in more than 3 years. The financial benefits of potentially reducing our return rate in the future are compelling, considering that for every one point decrease in our return rate, we'd expect to realize cost savings of approximately 30 to 50 basis points in reduced selling and distribution and fulfillment costs. Importantly, many of our efforts to reduce the return rate further elevate the customer experience, including by providing improved size guidance and leveraging technology and data for more personalized merchandising of products less likely to be returned. 2nd, we delivered strong results in expanding our international presence in the Q2 as net sales from international markets increased 13% year over year.

Speaker 2

Net sales increased across nearly all major regions including China where outstanding growth during the important 6/18 shopping festival in China led Revolve to be recognized as the 2nd largest seller of fashion merchandise on Tmall Global. The 6/18 Festival is the 2nd biggest event of the year in China for driving online sales, trailing only Singles Day in November. I'm also excited that we have launched a branded retail presence on the Douyin and Red e commerce marketplaces that serve more than 750,000,000 monthly active users on a combined basis. These incredibly popular platforms serve a young Gen Z demographic that skews female, a highly relevant audience for our fashion, beauty and lifestyle offerings. 3rd, we remain committed to efficiently investing to expand our brand awareness, growing our customer base and further strengthening our connection with the next generation consumer.

Speaker 2

Our team delivered outstanding results in the Q2 across brand and performance marketing channels, leveraging the strength of our brands. For instance, the Q2 was our most efficient quarter for performance marketing investments in nearly 4 years based on our performance marketing investment calculated as a percentage of net sales. Michael will talk about important wins in brand marketing efficiency measures that are also a key contributor to the increased marketing efficiency reflected in our updated 2024 guidance for marketing investments. And lastly, we continue to leverage AI technology to drive growth and efficiency while further elevating the customer experience. A perfect example is our recent development and successful launch into production of an internally developed AI search algorithm on our forward site.

Speaker 2

For years, consumers have searched for products on our sites through a 3rd party search platform. With the emergence of AI and as part of our data driven mindset, I challenged our team to develop and test our own AI search capabilities and test it against the incumbent retail search platform developed by a very large third party technology company. It is incredibly impressive that our internal team of data scientists developed a solution that outperforms the 3rd party search technology, driving higher revenue per search and at a much lower operating cost. With this success, our internally developed AI search algorithm is now live on forward and we are currently AB testing the algorithm on our revolve site with promising early results. To wrap up, we still have work to do, yet I feel great about the important progress we have made in the first half of the year.

Speaker 2

We began the Q3 of 2024 with solidly positive year over year growth in net sales for the month of July 2024 and there is momentum building across key growth and efficiency initiatives that we believe may further improve our foundation for profitable growth in the years to come. Now over to Michael.

Speaker 3

Thanks, Mike, and hello, everyone. I'm excited by the great progress we have made on our key priorities, especially the meaningful increased efficiency of our marketing investments year over year as we invest to build our brands and sort of strengthen our connection with the next generation consumer. Our newly reimagined Revolve Festival in April set the tone for the Q2 by exceeding our expectations and generating a much greater impact on our key metrics within the one day format in 2024 than we had achieved over an entire weekend for last year's event. But we didn't stop there. We had an incredibly active and efficient second quarter for brand building hosting impactful events at Stagecoach Festival, the Formula 1 Grand Prix in Miami, the Met Gala in New York and at our retail store in Athens as well as in international locations such as Mexico, Jamaica, Saint Tropez and Sicily.

Speaker 3

Particularly exciting was Revolve and Forward Met Gala after party with rap brand fashionista Cardi B that generated nearly 3,000,000,000 press impressions in top publications including Vogue, L, W Magazine, The New York Times, MSN, E News and People. At the center of all their press attention was Cardi B's incredible dress at the after party that was custom designed for her by our own brands team. Rave reviews in the press and on social media included Page 6 of The New York Post calling Cardi B's dress our red hot atelier Revolve number. Most exciting, when Cosmopolitan's trending of the best Met Gala after party looks, Cardi B and our Revolve Atelier dress ranked number 1 at the very top of the list. What's impressive is that we are much more active in the Q2 of 2024 and delivered significantly increased marketing impact while spending 1,000,000 of dollars less year over year.

Speaker 3

In fact, for the Q2, year over year growth in our press and social media impressions accelerated meaningfully, even though we spent $7,500,000 less in brand marketing than in the Q2 of 2023. Our impactful marketing efforts in the Q2 also helped to drive our reacceleration of active customer growth. Trailing 12 month active customers increased by 26,000 during the Q2, more than triple the increase in active customers in the Q1 of 2024. Let's shift gears and talk about our recent Bautier announced in June. We view the luxury industry challenges as an exciting opportunity to go on offense and invest in market share capture, supported by our consistent profitability and cash flow generation that sets us apart in fashion e commerce.

Speaker 3

So we have had our eye out for opportunities, but we took on an exciting transaction late in Q2 with the acquisition of an 80 percent ownership stake in Alexandre Bautier, an iconic luxury fashion house that we have sold them forward for many years. Alexandre himself retains the other 20 percent ownership of the business and he's equally excited to expand the partnership with the Revolve Group. Our team pursued a complex transaction in the depths of French bankruptcy courts, unlocking a compelling opportunity to acquire the Alain Voltier business for a commitment to invest €6,000,000 over the next 3 years.

Speaker 4

I will share just

Speaker 3

a few reasons why the entire Alexandre Bautier team are so excited about the combination. Alexandre Bautier is one of only 15 haute couture brands in the world, with recognition that is incredibly important to luxury customers. To provide some context, the term haute couture is legally protected and can only be used by brands approved by the Federation of haute couture and fashion, including Chanel, Christian Dior, Givenchy and Alexandre Bautier. We expect Revolving 4 to benefit from the association with the revered luxury brand, while giving us a direct line into the French fashion ecosystem. Approximately 30 Alexandre Bourdie employees are based in Paris.

Speaker 3

The brand marketing impact that Revolve can deliver is an ideal complement to the Alexandre Bautier brand that has stressed an incredible range of A Listers on red carpets, including Kendall Jenner, Rihanna, Beyonce, Taylor Swift, Selena Gomez, Katy Perry and Brigitte Macron, the First Lady of France. In close partnership with Augustin, we intend to relaunch the Voirier brand with a reimagined new collection in the fall, followed by a fashion show during Paris Couture week in January 2025. Also compelling are the expected synergies from our e commerce experience, data driven merchandise experience and operational excellence to help grow the Alexander Boteya direct to consumer business, which has historically been very small. Our creative teams are already working hard in designing a new Alexander Boteya e commerce site. With the Bottey brand coming off a period of underinvestment, in the near term we will understand that we need to invest ahead of the financial benefits we expect to realize in future years.

Speaker 3

In summary, there is a whole lot of work to do, yet we see a ton of opportunity to grow this brand on our platform through wholesale and other distribution channels in the years to come. We have also increased our organic investment in our luxury business. Capitalizing on the availability of outstanding talent, we have made a variety of strategic investments at Forward that we believe can advance our pursuit of the vast number of effectively abandoned luxury customers that are up for grabs with all the recent industry disruption. As a case in point, 2 weeks ago, luxury e commerce retailer Match's fashion was shut down entirely. The business that in 2022 reportedly generated $460,000,000 in revenue.

Speaker 3

Also important, the recent industry malaise has reinforced the brands that Ford is an attractive partner due to our product curation, distinct styling point of view and incredible brand marketing engine that has attracted young luxury customers. I am pleased to share that Nike has recently committed to the full range of products on board for the first time, building on NIKE's success and longstanding partnership with selling and revolve. Now I will conclude with an update on our evaluation of the physical retail opportunity. I am excited to share that our key performance metrics such as traffic, sales and customer engagement at our 1st permanent retail store in Aspen continue to be encouraging. Summer has been a great selling season further illustrating our potential in this new market opportunity.

Speaker 3

I view our early momentum in physical retail as impressive considering that we are still doing a great deal in the early stages of our retail journey. Mike and I have always believed that when a part of the business is performing as strongly as ASIM has so far, we want to invest into that opportunity in a much bigger way. Exploring retail expansion is especially exciting considering that most apparel sales still happen in physical stores. At the same time, we recognize that physical retail is a new and adjacent market opportunity for us that we haven't fully mastered. We have booked an incredible brand that we believe can translate to physical retail, but before we move too quickly and to truly assess the long term growth potential, we need to first validate that we can replicate the success in acting in other locations.

Speaker 3

To guide us through the next phase of our journey in testing physical retail beyond Aspen, we have engaged one of the most accomplished retail advisory firms in the market. Our partner has played a key role in retail expansion for some of the world's most respected consumer brands, including Apple, Lululemon, Abercrombie and Fish and Restoration Hardware. The deep industry experience will help us navigate critical decisions on evaluation of potential markets, retail set selection, negotiation, architecture and store design. We are very excited to further explore and test the launch of opportunity in physical retail. We should have an update on what comes next by our Q3 conference call in early November.

Speaker 3

To summarize, it feels great to see our team's hard work on growth and efficiency initiatives deliver results on the top and bottom line. With our powerful brands we have invested in for more than 20 years, operational excellence and strong financial position, especially compared to our fashion e commerce peers, we believe that we are well positioned to pursue profitable growth and market share gains. Now, I'll turn it over to Jesse for a discussion of the financials.

Speaker 4

Thanks, Michael, and hello, everyone. I am very pleased with our Q2, both from a financial standpoint and even more so by the progress made by the team on our operational initiatives that gives me increased confidence in our financial outlook moving forward. I will start by recapping our Q2 results and then close with updates on recent trends in the business and our outlook for gross margin and cost structure for the balance of the year. Starting with the Q2 results, net sales were $282,000,000 a year over year increase of 3%. Revolve segment net sales increased 4% and forward segment net sales decreased 4% year over year.

Speaker 4

In terms of geography, both territories returned to year over year growth in the Q2. Domestic net sales increased 1% year over year and international net sales increased 13% year over year. Active customers, which is a trailing 12 month measure, grew to 2,600,000, an increase of 5% year over year. Total orders placed were 2,300,000 flat with the prior year. Average order value or AOB increased 2% year over year to $306 benefiting from the higher mix of net sales at full price year over year.

Speaker 4

Another contributor to the improved year over year net sales growth was that our return rate decreased year over year in the Q2 as the many initiatives designed to reduce our return rate in customer friendly ways have begun to deliver visible results. Consolidated gross margin was 54%, an increase of 7 basis points year over year, driven by a year over year increase in our higher margin Revolve segment. Let's move on to operating expenses, which was a true highlight that drove our meaningful operating leverage in the 2nd quarter. Of note, we delivered better than expected operating expense efficiency across each of the four line items that we guide to each quarter. Fulfillment costs were 3.3 percent of net sales, around 10 basis points more favorable than our guidance and a decrease of 15 basis points year over year.

Speaker 4

Selling and distribution costs were 17.9 percent of net sales, also better than expected by approximately 10 basis points and lower by 73 basis points year over year. This year over year decrease reflects the continued great work by our teams to drive efficiency in our logistics costs, while also benefiting from the slight decrease in our return rate year over year. The biggest source of outperformance in the Q2 versus our guidance was marketing, which came in at 15.2 percent of net sales, significantly below our guidance of 17% of net sales. This represents a 360 basis point decrease year over year compared to our marketing investment of 18.8% of net sales in the Q2 of 2023. General and administrative costs were $33,500,000 around $500,000 lower than our outlook.

Speaker 4

That reflects a year over year increase that continue to outpace our net sales growth as we continue to invest in initiatives that support our long term growth opportunity. Our tax rate was 26% in the Q2, up slightly from 25% in the prior year and within our expected range. The increased net sales and gross profit year over year, the meaningfully improved marketing efficiency and the outstanding progress driving efficiencies in our logistics costs help us drive impressive growth on the bottom line. Net income was $15,000,000 or $0.21 per diluted share, an increase of 111% year over year. Adjusted EBITDA was $20,000,000 an increase of 97% year over year.

Speaker 4

Moving on to the balance sheet and cash flow statement. Net cash used by operating activities was $25,000,000 and free cash flow was negative $27,000,000 in the Q2, primarily due to unfavorable working capital movements that more than offset the increased net income. For the 6 month year to date period in 2024, we generated positive operating and free cash flow, although lower year over year, primarily reflecting an increase in inventory investments to support a return to top line growth compared to a declining inventory balance in the first half of twenty twenty three, when we were very focused on rebalancing our inventory position. Inventory at June 30, 2024 was $234,000,000 an increase of 14% year over year. As of June 30, 2024, our balance sheet remained in a very strong position with cash and cash equivalents of $245,000,000 and no debt.

Speaker 4

The decrease in cash and cash equivalents year over year compared to June 30, 2023 primarily reflects positive cash flow from operations that was more than offset by our stock repurchases exceeding $40,000,000 in the last four quarters. Our strong financial position enabled us to execute on our capital allocation strategy in an effort to enhance shareholder value through 1, investing in the business to support the long term growth opportunity ahead of us 2, opportunistically pursuing strategic M and A and partnerships and 3, returning capital through our stock repurchase program, where we repurchased approximately 119,000 Class A common shares at an average price of $15.83 during the quarter. Approximately $60,000,000 remained under our $100,000,000 stock repurchase program as of June 30, 2024. Now, let me update you on some recent trends in the business since the Q2 ended and provide some direction on our cost structure to help in your modeling of the business for the Q3 and full year 2024. Starting from the top, our return to positive year over year net sales growth has continued into the Q3 with net sales in July 2024 increasing by a mid single digit percentage year over year, a sequential improvement compared to the year over year trend reported for the Q2 of 2024.

Speaker 4

Shifting to gross margin. We expect gross margin in the Q3 of 2024 of between 52.3% 52.5%, which implies an increase of approximately 70 basis points year over year at the midpoint of the range. For the full year 2024, we continue to expect gross margin to be between 52.5% 53%. Fulfillment. We expect fulfillment as a percentage of net sales of approximately 3.4% for the Q3 of 2024, a decrease of approximately 20 basis points from the fulfillment efficiency ratio in the Q3 of 2023.

Speaker 4

For the full year 2024, we continue to expect fulfillment costs of between 3.3% 3.5% of net sales. Selling and distribution. We expect selling and distribution costs as a percentage of net sales of approximately 18.3% for the Q3 of 2024, which implies a year over year improvement of approximately 70 basis points. For the full year 2024, we continue to expect selling and distribution costs to improve to a range of between 17.8% 18% of net sales. I also want to note that our outlook for fulfillment costs and selling and distribution costs continues to assume a return rate that is flat year over year for the full year 2024, consistent with our expectation at the beginning of the year.

Speaker 4

We are optimistic that our great progress in the Q2 of 2024 in reducing the return rate year over year will continue and the team is working hard to achieve this. However, since the improved return rate happened late in the Q2, as encouraged as we are, I am not yet comfortable factoring in a lower return rate into our financial outlook until we can prove it out for a longer period. Marketing. We believe our strategies to drive impactful marketing campaigns at an increased level of efficiency will continue. We expect our marketing investment in the Q3 of 2024 to be approximately 15.2 percent of net sales, a decrease of approximately 20 basis points year over year.

Speaker 4

For the full year 2024, we now expect our marketing investment to represent between 15.3% 15.5% of net sales, which is a decrease of 70 basis points from our prior full year 2024 guidance range for marketing investment. General and administrative. Offsetting some of the increased marketing efficiencies is our expectation for higher G and A costs than our prior full year guidance. We expect G and A expense of approximately $35,500,000 in the 3rd quarter. For modeling purposes, remember that our G and A expense in the Q3 of 2023 a year ago included a non routine accrual of $6,600,000 for a then pending legal matter that we do not expect to reoccur this year.

Speaker 4

For the full year 2024, we now expect G and A expense of between $135,000,000 to $138,000,000 which at the midpoint is an increase of $3,500,000 from the high end of our prior G and A guidance range that we guided to on last quarter's earnings call. The majority of the G and A increase from our prior outlook is related to the Alexandre Lottier acquisition completed late in Q2, including around 30 employees based in Paris and our investment to relaunch the Alexandre Lothier brand and B2C website in the coming months.

Speaker 5

The remainder of the increase in

Speaker 4

our G and A outlook for the full year 2024 relates to increased investment in certain key areas where we see timely opportunities to invest today to even further increase our competitive position and drive future results such as the forward investments that Michael discussed and continued investment in AI technology where we have already delivered meaningful growth and efficiency gains throughout the company. And lastly, we expect our effective tax rate to be around 24% to 26% in the 3rd quarter and 25% to 26% for the full year 2024. To recap, I am very encouraged by our 2nd quarter results, highlighted by the return to top line growth, operating discipline that drove a more than doubling of net income year over year and driving the 1st year over year decrease in our return rate in more than 3 years. Now, we'll open it up for your questions.

Operator

Your first question today comes from the line of Rick Patel with Raymond James. Your line is open.

Speaker 6

Thanks. Good afternoon, everyone, and congrats on the great progress. I was hoping to get some additional color on second quarter results by month. And also any additional color you can add to quarter to date trend as we think about the REVOLVE platform versus Ford? And I'm curious if the KPIs that drove the 2nd quarter results are the same ones that you're seeing drive a modest acceleration for July?

Speaker 5

Yes. Thanks, Rick, and thanks for joining. This is Jesse. On the intra quarter trends for Q2, if you remember last quarter, we said we were up in the low single digit range through April, and we closed at plus 3. So I think relatively consistent throughout the quarter with maybe a slight improvement as we progress through the quarter and then that continued into July.

Speaker 5

And then if you look at July, I'd say largely the same trend in July as you saw in Q2 with Revolve and International outperforming the domestic and forward businesses. But overall, really healthy and good progress again as we move through the quarter and then into July and similar KPIs as well.

Speaker 3

Great. And on the

Speaker 6

returns rate, it sounds like you're not baking in the progress that you saw late in the Q2 for

Speaker 4

the rest of the year.

Speaker 6

Does this reflect conservatism until you see a little bit more traction? Or is there something about maybe the seasonality of the business where returns usually tick up around holiday or certain other peak periods that would give you pause in incorporating that into updated guidance?

Speaker 5

Yes. I think I wouldn't necessarily say that it makes in conservatism. I think it trended well, but in the back half of the quarter. So we don't want to get too excited yet. There's great progress, but we want to see a little more traction before we bake that in.

Speaker 4

And I think we talked about

Speaker 5

the year over year decrease in return rate, but I think even more importantly is there is seasonality with return rate from Q1 to Q2. Q2 is generally our highest return rate quarter of the year. And we saw Q1 to Q2 being flat. So just another data point to support that return rate in the second quarter.

Speaker 4

Thank you very much.

Operator

Your next question comes from the line of Michael Binetti with Evercore. Your line is open.

Speaker 7

Hi, this is Jessie Nwong on behalf of Michael Binetti. Just a little bit on the marketing costs, We lowered the full year guidance even though Q2 came in lower and I know we alluded to higher efficiencies on the marketing. Should we be seeing this permanent efficiencies kind of flow through in the out years? And then the other question would be on the active customers trend. How should we think about that heading into the second half of the year?

Speaker 5

Yes. Thank you. This is Jesse again.

Speaker 4

On the marketing, yes, we had

Speaker 5

a great quarter in terms of efficiency and it's both on the brand marketing side, as Michael mentioned, investing $7,500,000 less in Revolve Festival than we did last year and getting even better results. So that was a big driver in Q2, and we're continuing to see that efficiency on the brand marketing side in the back half of Q2 and into the back half of the year. But also important to note is that we

Speaker 4

did see efficiency on the performance marketing side as well. So that's

Speaker 5

what we baked into our guidance. If you look into the out years, we'll continue to be opportunistic

Speaker 4

when it comes to marketing and kind of

Speaker 5

read the landscape. So not commenting too much more beyond that, but really happy with the efficiency this quarter. And then on active customers, great to see that active customer number holding at plus 5% and an incremental increase in the active customer count. As we've communicated on prior calls, we expected that growth rate to come down and approximate the net sales growth rate over time as we lap some of those higher customer growth periods of last year.

Speaker 4

I think we'll continue to expect to

Speaker 5

see similar as we go into the back half of the year, but not a significant increase to that growth rate until we lap out of that Q1 twenty 23 heavy markdown period that we're in that drove a lot of new customers. And I think on that customer point, also important to note that the growth came full price customers, which are very healthy customers, partially offset by lower markdown customers, again, as we comp that Q1 2023 period.

Speaker 7

Thanks guys.

Operator

Your next question comes from the line of Dylan Carden with William Blair. Your line is open.

Speaker 8

Great, thanks. Just curious any update on Beauty Men's attachment rates or sort of how those businesses are trending? And any help you can give on I know it's early days sort of timing of the retail strategy. I guess you just engaged the consultants, but is that in your mind something like a 2025 rollout or anything there would be helpful as well?

Speaker 5

Thanks. Yes. I'll start with the Beauty and Men's. Seeing great progress on both of those areas of the business. As we commented, 25% growth on Beauty.

Speaker 5

Men's growing nicely as well. We're also seeing really great growth in the Home product category, very small, but still really healthy growth there. So good progress, the team continues to execute, add new and exciting brands, especially on the beauty front. And in timing of retail, I think we mentioned on the prepared remarks, we have engaged the consultants. We are actively, I guess, pursuing, investigating, learning, but we want to caution that we are moving very pragmatically, learning as we go and we'll have an update in our next quarterly call.

Speaker 8

And I know you're probably not going to answer this one, but the brand strategy and sort of acquiring the acquisition that you made, I know you're being opportunistic, but is that something that if you kind of see those opportunities arise, you wouldn't bulk at, you kind of maybe form some sort of stable of brands here?

Speaker 3

Yes. The adoption in the marketplace has really provided unique opportunities here. We think that forever, forever in our zone to our customer, strong design talent, unique design talent and brands that are aligning with that kind of our overall kind of brand ethos is important. So we're excited to come across this and if we're able to come across other opportunities with similar type profile and metrics, we wouldn't hesitate to pursue more.

Speaker 8

Very good.

Speaker 3

Thank you

Speaker 4

very much.

Operator

Your next question comes from the line of Mark Altschwager with Baird. Your line is open.

Speaker 6

Good afternoon. Thanks for taking my question. Also wanted to follow-up on the marketing. Significant upside to your plan there, significant change to the guide for the year. So I just want to better understand where you're seeing the efficiencies, what has changed in the landscape relative to a few months ago?

Speaker 5

I

Speaker 6

know you said you're pleased with Revolve Festival, but I guess the spend there was known at the time that you guided. And just any change to the underlying expectation on the top line that informs that guide for the year?

Speaker 3

Yes. I'll speak particularly to the brand marketing side where we saw great gains here where significant reduction in spend, but actual outperformance compared to last year. And we really challenged the team to continue to evolve and to continue to get better. The landscape outside what we do on the brand side is a broad universe, but also it's a level below is a very diverse portfolio. So we reallocated to certain zones and certain strategies that have been super, super effective and challenged the team to really do more with less.

Speaker 3

And they've proven very extremely and positively that they can do so. So we will continue to push that. But this will enable us to do at the appropriate time as we experiment with tools, different strategies

Speaker 6

in the future. So there's a lot in the future that you'll see from

Speaker 3

us that is different experimental and hopefully very, very exciting and effective and that will be coming in the event. We'll seek to drive greater efficiency, reduce spend, but continued performance by our internal metrics.

Speaker 2

Yes. And certainly on the digital or performance marketing side, we challenged the team to do more with less and they delivered. That said, I'd say it's very landscape dependent. And so sometimes we'll see periods we're able to get some nice efficiencies. There will also be periods where the environment gets a little bit more challenging.

Speaker 2

So I think it's difficult to say whether it's a trend that continues through the back half of the year, but we're very pleased with the results of the

Speaker 6

performance marketing side that we've seen thus far. Thank you. And then, Jesse, on gross margin, historically, we've seen a bigger sequential uptick in revolve segment Q2 versus Q1. That looks a bit more muted this year. Maybe unpack some of the puts and takes there and just any implications as we think about the back half of the year?

Speaker 6

Thank you.

Speaker 5

Yes. No significant implications as we look at the back half of the year. I think this year different from years past and of course the last few years have been very abnormal with COVID coming out of COVID inventory correction etcetera. But if you go back in time, there has been more of a seasonal impact there, but also much different kind of skew on the full price markdown mix that was more consistent this Q1, Q2 than it has been in the past.

Operator

Your next question comes from the line of Oliver Chen with TD Cowen. Your line is open.

Speaker 9

Hi, everybody. As we look forward to Q4, the comparison tough is

Speaker 5

a little

Speaker 9

bit. What are some major catalysts for Q4 in terms of the potential to maintain that comp or improve? And any catalysts we should think about for back to school and holiday? Also would love your view on the customer behavior. As you know, the macroeconomics, we've been seeing bifurcation and inflation pressure, but your growth continues to be really nice.

Speaker 9

So would love your thoughts on how the macros and the health of your customer is interplaying with what you're seeing? Thanks a lot.

Speaker 2

Yes. So we feel really good about the trends we saw in the Q2 continued into Q3. And we know others out there have commented on some weakening of the customer and some macro pressures. Thankfully, it's not something we're seeing in our own data. How much that speaks to the macro environment versus us just executing well and gaining strength in the market, I think is too early to say, but we feel great about our own trends that we're seeing there.

Speaker 2

As we look at the back half of the year, I'll leave it to Jesse to go into any comp discussion, but we're focused on making our business the best it can be. We feel good about the trends and we're hopeful

Speaker 6

that bodes well for H2.

Speaker 5

Yes, nothing significant to add on the comps. You mentioned the comps do get slightly tougher. Holiday season, as you know, isn't as big for us as it is for others in terms of seasonality. So I know there's that tough shorter holiday season, but while it may have some impact, we don't expect a significant impact there. Back to school is a great season as well, but again, not over indexing for us like it does others.

Speaker 5

So I would say nothing specific to call out. And then I think just all of the initiatives that the team has been working on through last year and into the first half of this year that continue to really take effect and you could see visibly in the results this quarter will continue to build.

Speaker 9

Okay. Lastly, you've done a really good job like optimizing customer lifetime value with new brands that you've added, own brands with an older customer as well. What are your thoughts on your private label capabilities now? And which parts of your assortment do you feel like have the most opportunity for further improvement?

Speaker 3

Yes. Thank you. I think that there's definitely been a lot of work there. I think the broadening of the assortment over the past several years refinement is really that's also, as Mike mentioned, one of the many things that's continued to drive performance in this challenging environment and we expect this to continue to drive growth in the future. In addition to own brands, we've seen kind of the arc of expansion and contraction and now we're in a phase of kind of a choppin ultimately what we believe will be steady expansion over the near term and long term.

Speaker 3

I think this is part of it is the expansion outside of kind of our historic strength of dresses, which still remains very, very strong expansion to other categories we're supposed to be seeing in the near term in terms of like kind of what we would view as more core essentials foundation product, which also can be stylized and be very cool fashionable, but also very premium as well. These things that we know our customers buying and shopping, but sometimes they're not always thinking of us as the 1st place to go. So we'll be seeing effort and energy in that space. We think there's also effort and energy that we can see in kind of the younger consumer as well. I think that's an area that's yet to really be fully, fully nurtured.

Speaker 3

So we see a broad roadmap to really enhance that own brand experience over the last cycle of the customer as well as kind of all aspects of the closet. I think that a lot of room to go in that zone.

Speaker 9

Thanks Mike and Mike and Jesse. Best regards.

Operator

Your next question comes from the line of Matt Koranda with Roth Capital. Your line is open.

Speaker 10

Hey guys, thanks for taking the question. Just can you put a finer point, Jesse, for us on the progression of Q3 last year? Remind us, I think you said comps get tougher, but I'm not sure if you were talking about Q4 or you're talking about the progression of the Q3, so maybe August September, if you could do that.

Speaker 5

Yes, yes, sure. Yes, I was more referencing the Q4 that gets a little tougher, that Oliver was referencing. If we look at the Q3 last year, if you recall, we commented that July was down mid single digits. We closed the quarter at minus 4%. So it's plus or minus in the zone where we're roughly even comps through the quarter.

Speaker 10

Okay. Got you. And then just one on since a lot of others have been answered, I was curious on the inventory balance. It looks up quite a bit more than sales year over year. So just wondering maybe if you could speak to the assortment, what we're positioning for.

Speaker 10

It sounds like you guys sound pretty upbeat like we're going to see additional growth and obviously July was good. That seems like maybe we're preparing for some future growth, but maybe just if you could speak to the assortment, how we feel about it, health of inventory, that'd be great.

Speaker 2

Yes. So on the Revolve side, we feel very good about the health of the inventory. It is turning ticks lower than we would like to see, but we feel like the health is good and the areas we're a little bit over invested in are areas of lower markdown risk. So some room for optimization, but we think it's within the zone of a healthy turn that we're able to manage well. And it's something we have our eye on, but we feel good about the mix and the path going forward with the inventory.

Speaker 5

Yes. And maybe just to add to that, Matt. The increase that we're seeing is primarily on the REVOLVE side, which as you know is much more in favor for us, easier to control and the assortment is great, like Mike said. Forward, a few quarters ago and for the past several quarters, been commenting that we feel like around mid year we'd be more back in check on the forward side and we've made great progress there. The differential on the inventory sales growth for forward is much tighter.

Speaker 5

And so I think essentially they're on Forward.

Operator

Your next question comes from the line of Jay Sole with UBS. Your line is open.

Speaker 6

Great. Thank you. I'm wondering if you can elaborate a little bit on your comments you made about AI, about the internal search engine and also in the comments about elevating the customer experience that you mentioned in the press release. If you could talk a little bit more about kind of where you see the company's ability to really use AI to the business going, that would be helpful. Thank you.

Speaker 2

Yes. So, yes, we're really proud of the results with the internal search. And where it really excels, I think, is in things that traditional search

Speaker 6

struggle with, right?

Speaker 2

So it's understanding general aesthetics and broader concepts that traditional search struggles with. So and it wasn't just a small win too, it's a very resounding win versus very respected platform from the 3rd party company. So we're really pleased with those results. They look good on our evolve thus far also. And I think more broadly speaking, this sort of technology really opens up doors in terms of innovating in the customer experience, right, where it can be good at search, but the types of things it's good at lend themselves much more broadly than search, just new ways of customers exploring and navigating the website, new sorts of features we can put together.

Speaker 2

Some of which we have in kind of for smaller portions of our customers some initial tests and those types of things. But I think over the coming years, you're going to see that really evolve a lot and our goal is to be at the forefront of that.

Operator

Your next question comes from the line of Jim Duffy with Stifel. Your line is open.

Speaker 11

Hi, this is Peter McGoldrick on for Jim. Thanks for taking our questions. Jesse, can you break out the increase in G and A dollars and guidance between the Votier business and other investment areas? As we think about normalized G and A run rate going forward, is there any component that's a one time cost related to the relaunch that should not recur? And then related to that, how should we be thinking about the contribution to the top line from the Votier brand?

Speaker 5

Yes, sure. So if you look at the back half of the year and that increase of $3,500,000 call it, I'd say about half is a little more than half is from Gauthier specifically. And then a meaningful portion of that remainder is due to the investments that we mentioned, still making investments in AI, making some really good investments on the forward side of the business. If you peel back the, call it, non routine and investment areas, G and A is in the kind of mid single digit plus zone, so closer to in line with the sales growth. In terms of contribution from Vaudier on the top line, not until later this year, early next year until we see some good movement there.

Speaker 5

As we mentioned, this is kind of restart, rebuild, build the website and launch the first collections there later this year into early next year.

Speaker 11

Excellent. And then on international regions, you pointed to encouraging signs out of China. I was wondering if you break out contribution from other regions. Is anything standing out on a dollar contribution or growth rate basis? And how has international progressed quarter to date relative to the mid single digit growth overall?

Speaker 2

Yes. So Q2 was a really strong quarter for international, both in terms of the absolute result and also just broadly speaking across regions. We saw nearly every region in the green internationally in Q2. And the standout regions continue to be some of the standout regions of past quarters. So Mexico in particular, we continue to see really strong growth in.

Speaker 2

But we're really encouraged by regions like United in China that we saw growth in China despite there being some headwinds there. We feel like we've made some good solid progress in China. As you know,

Speaker 6

a couple of quarters ago, we mentioned

Speaker 2

we were making a little bit more investments into that region. Obviously, there's a huge opportunity there. And so we started to see some impacts of those investments this quarter and we're hopeful we'll see more of that in the quarter to come.

Speaker 1

Thank you.

Operator

Your next question comes from Sean Dunlop with Morningstar. Your line is open.

Speaker 12

Hi, guys. Thanks for taking the call. I had one on the return rate initiatives. It looks like we shortened the return window and used AI fraud detection to sort of avoid wardrobing. Good to see the progress there.

Speaker 12

I guess I'm curious, has there been any discernible pushback from consumers? Have they reacted to that at all? I guess with us seeing a little bit less than one order per quarter on average, is that something we would have seen in period or something that we're sort of keeping an eye out in future quarters?

Speaker 2

Yes, great question. So through our own customer service channels, we haven't seen really any kind of pushback against the return policy change. And it's still a very generous arguably industry leading or certainly amongst the industry leaders in terms of the generousness of the return policy. So the return window was shortened to 30 days for cash credit, but actually 60 days for store credit. So consumers still have quite a long time to return items and we're very friendly with customers if there's any kind of issue or exception.

Speaker 2

So

Speaker 3

we think it's been

Speaker 2

a very positive change. As we look at our own data, there's a whole host of things we've been working on with regards to returns. We think some of the impact in the second quarter may have been

Speaker 6

from that policy change, but we think a lot of the impact was through a number of these

Speaker 2

other areas that we've been we we fine tune them and get them right. So we'll have to see how the year progresses, but we're hopeful over time we can continue to make a big impact there.

Speaker 12

Got it. That's helpful. And then just one more for me on repurchases. It looked like just $1,900,000 there during the quarter. And I guess I'm just curious what plays into that capital return philosophy with just a little bit less than $60,000,000 remaining on the authorization.

Speaker 12

It seems like at current prices that might be a pretty good investment.

Speaker 5

Yes. No, we think over the course of last 4 quarters, it's been a great investment. And like you said, we still have $60,000,000 there available. So we'll continue to be active. No comment on kind of when and how and at what price

Speaker 4

we buy, but happy with the progress thus far. Got it. Thanks so much.

Operator

Your next question comes from the line of Ashley Owens with KeyBanc. Your line is open.

Speaker 13

Hi, thanks. Just a quick one for me and maybe on Florida, but talked a little about the inventory progress there. Just any color on how return rates are looking? And then just any insight on the gross margins there? Are we at the point of inflection yet?

Speaker 13

Or when should we start to expect to see that shift? Thanks.

Speaker 5

Yes. No specific comment on return rate specific to forward. I think just commenting on that overall. And to highlight the return policy change that Mike was mentioning was made on revolve only. We never shifted the forward return policy during COVID like we did on revolve.

Speaker 5

So not an impact there on forward. In terms of margin, as I mentioned, we made great progress on the inventory balance. Markdown margin is still lower than where we want it to be, and that is showing up in the overall gross margin for forward, with the goal of getting that back into the 40s over the kind of near to

Speaker 2

midterm.

Operator

Your next question comes from the line of Jeanine Stifter with BTIG. Your line is open.

Speaker 6

Hey, you got Ethan Saggey on for Janine. I just want to ask one quick one on owned brands. I was just wondering as you guys are looking to start expanding that penetration again, if you have a target in mind of where you'd like that to get? And if so, what the time line would be to get there? Thanks.

Speaker 9

No. We don't have a particular target

Speaker 3

when it comes to own brand. I think the ultimate goal is just to get product, get the best product in front of our consumer. We think for the portion of own brand, we are doing that great. You see our even more countries is down from our peak. Our personal metrics, our internal personal metrics are better than ever.

Speaker 3

So feeling incredibly great about that and feeling confident about expanding. But there is no long term target. There is no there are very modest improvement of the near term as how it can be in the near term. But also things that if we continue to do our job for years, I think there's no reason why we can't get to the penetration numbers of times past, but of course, we think that this is far into the future.

Speaker 4

Got it. Thank you.

Operator

Your next question comes from the line of Janet Kloppenburg with JJK Research. Your line is open.

Speaker 14

Hi, everybody. Congratulations on the progress. I just had 2 quick questions, just getting back to the inventory.

Speaker 4

I think

Speaker 14

you said it was isolated to revolve. Is that new categories or deeper investment in private label? Maybe help us understand Q3? And just lastly, as you think about July and your solid trends, any discernible change and spending on dress up versus casual or denim or anything like that that you think you're well positioned for? Thank you.

Speaker 5

Yes. Sure, Janet. Thanks for the questions. On inventory, we expect to be kind of year over year increase in the same zone as we are in Q3 as we are today. No specific kind of categories or 3rd party versus own brand dynamics to call out, but feel good about the health of the inventory there.

Speaker 5

And again, being on Revolve, much more versatile kind of in our control than on the forward side, so very manageable. And then no comments on any more specifics around the July trend other than to say what we already said where Revolve and international continue to outpace the domestic and forward side of the business.

Speaker 14

Okay. Thanks so much.

Speaker 3

Yes.

Operator

That's all the time we have for questions today. I will turn the call back to management for closing remarks.

Speaker 3

Thank you guys for joining us on this quarterly earnings call. We're really proud of the results and the progress that we've made, really that has been broad based across number of functions, the entire team performing at a very high level, but with a lot of work that's gone and foundation that's been laid over many, many quarters before. We're excited for continued progress ahead knowing that this is great product, but also knowing that there is a lot more progress to make, a lot more opportunities in between in front of us and beyond. We're quite prepared and excited for any turbos ahead as we have with the time past and looking forward to the dynamic landscape and looking forward to another quarter call with you guys very soon.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Revolve Group Q2 2024
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